Thoughts on Loan Types

9 Replies

I have 2 loans I’m considering.  One is A. commercial loan, 15% down, 15 year term, 5.5% interest rate - after year 7 you will need to “renew” the loan (not actually refinancing it).  It gives the bank an opportunity to adjust the rate.  I will get this all written out on Monday.  I’m relaying EXACTLY what the banker said to me.  

The other is B. 25% down, 30 year term, 4.99 interest rate. This will be a long term investment, primarily interested in cash flow as opposed to market value.  Both are smaller regional banks.  I feel most comfortable with the people of loan option B.  But they are both well known banks.

I’m buying duplexes.  Bank B is insisting that it’s 25% down (across all banks), Bank A figured it out and is saying they can do it for 15% down.  

I’m NOT interested in getting involved in any shady business!  Have you heard of option A type koans.

Any thoughts on this?

@Felicia Hamilton Longer amortization period will give you positive cash flow. You are planning to keep this property for longer term so bank B would be good option.

Hi Harjeet, thank you for responding.  It’s a heavier lift for me to come up with the 25% down, which is why option A is so attractive.  I was just curious how one bank could consider this “commercial” when the other considers it “multi family”.   Are there no uniform rules across the industry?  Bank B does not offer the 15% down/15 term.  

@Felicia Hamilton

commercial is a non-conventional loan.  I have done commercial loans for multi-family, retail, office, etc.

Mark

@Felicia Hamilton you will find with commercial loans that lenders will offer all sorts of different offerings depending on how much they are wanting to lend on a particular product type. So, you just have to shop around and select products that work for you.

One other thing I suspect is going on is that your option B is a conventional Fannie/Freddie loan product not a commercial loan. The reason I say that is because it's 30 year ammortization and I've never seen that on a commercial bank product.

Those loans are like gold because as another poster suggested above your cash flow will be much better with a 30 year amm. You're only allowed to have 10 of them though so I always suggest investors get 10 of those before using commercial. But it does depend on your goals. 15% down is also very attractive and I've never had a bank offer me anything lower than 20%.

Would really appreciate it if someone could offer me some additional insights here... so I had decided to move forward with the 15% down loan since it was easier on my pockets.  The 15% DP, would have wiped out my savings, however, I wasn't overly concerned as I do have a decent gig, relatively low expenses, a healthy amount of available credit and expected cash flow from another investment property in which I would start to re-build my savings.  

The bank had reservations about my using all my cash for the DP and offered me 100% financing, however, I would have to use my investment property as additional collateral.  What are your thoughts on this deal?  On one hand, I'm happy not to use my cash, but on the other hand... I'm risking a property that I own outright and is cash flowing nicely.  WWYD?

I think it really depends on what strategy you are aiming for. If the 100% financing has similar terms, having that cash available would be really nice. You could always pay the loan down faster if you wanted. My first investment property was last year, and I definitely miscalculated repair costs --it was a very good thing that I had reserves available.

Thanks Timothy.  I'm new to this as well.  My first property was also last year, and am hoping to complete the purchase of the next two before the end of June (this is the deal in question).

My goal is 2 properties per year... so after June I will use the remainder of 2019 to sit back and monitor, refine housing policies, maybe take a RE course, move to e-docs lease signing... basically just come up with ways to automate and make things easier for myself moving forward (since I also have a semi-demanding FT job).

Felicia, I work for a local community bank and we do those type of loans all the time for investors. We will take equity out of one property to use as a down payment for the purchase of another (I actually do this myself for all of my deals). This allows the investor to keep their cash liquid so that when repairs are needed they are not having to pay for another loan. I have even done deals for investors and myself where we take other types of collateral, such as boats, vehicles, equipment, etc. So I wouldn't be to worried about that. The other great thing is, at anytime you can get a new appraisal and if the property can support the loan on its own the bank will release the hold on 2nd piece of collateral. At least that is what we do. 

As for the 7 year period, from what I am seeing in the market is that rates are close, if not already, at their highs. This is a different economic landscape that the federal reserve is dealing with compared to the 80's. The FED is realizing that if rates go to high then no-one will be financing home purchases and expanding their business. These are two main factors in growing the economy. This economy cannot support rates much higher than this, so it is very likely that rates will either be down or about flat from this point in my opinion. 

Mitchell, thanks a ton for your feedback!  Just today I decided to move forward, so reading your response really helped settle my mind on the issue.

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